Punch Taverns, the leased and managed pub group, is understood to be planning to press ahead with restructuring plans that could see it jettison more than 5,000 pubs.
The group, led by former Marks & Spencer finance director Ian Dyson, is believed to have instructed its advisers to draw up plans that will see it default on long-term debt secured against 5,325 leased pubs.
The move will effectively see control of the pubs pass to bondholders although observers believe the development will prompt negotiations with Punch over a restructuring of some of its debt.
Sustained reports in the national newspapers – most recently in the Sunday Times and Financial Times at the weekend – suggest that Dyson is committed to walking away from the pubs if negotiations do not result in a material adjustment to the group’s £3.1bn debt position.
Dyson is worried that such is the high level of debt attached to these pubs in the form of two securitised structures that they will act as a cash drain on the group.
As things stand the two debt structures (known as Punch A and Punch B) attached to 5,325 pubs from the group’s leased estate is likely to suck £40m a year from the group from next August. At the moment the debt structures are cash neutral – but the amount of profit they produce is used entirely to service debt.
Punch is being advised by Blackstone and Goldman Sachs.
The situation has reportedly won the interest of distressed debt specialists, who could attempt to buy the debt at a discount.
Some bondholders reportedly believe that situation is a symptom of its “poor performance” pointing to its 11% decline in like-for-like leased profits, although they say that the company should stop “hiding behind the market”.
Michael Cox, of UBS European, who is regarded by some as the best analyst of the debt markets, thinks the bondholders should make concessions to retain Punch’s management of the 5,325 leased pubs in the two securitisations that stand to become a cash drain on Punch.
He said change was inevitable. He said: “The more we analyse the deals, the more we think that the status quo is not an option.
“However, our view is that Punch has little to lose by trying to engage with bondholders on restructuring options before considering the nuclear option of allowing a default on Punch A and/or Punch B and walking away from the pubs.
“While the deals are structured to be able to withstand the insolvency of the borrower, and therefore investors are in a relatively strong position, the better solution is likely to be one that retains a motivated and capable equity sponsor.
“However, the difficult question is whether the concessions necessary to achieve that are a step too far for bondholders.”
